Protect Yourself From Falling House Prices

Alison Hunt looks at what you can do to protect the value of your home if house prices are falling.

This article was sent to Fools via email on January 4th.

I'm continuing our 'Your Finances in 2012' campaign by looking at what you can do to protect the value of your home if house prices are falling.

We all know that house prices have been rising at astronomical rates over the last few years. But if you check out the latest headlines from newspapers, websites or speak to estate agents it seems that this trend may be slowing, or even reversing. So our resident guru David Kuo's first prediction that the average house will be worth £13,000 less in 2012 than today could turn out to be true.

Well, from personal experience, as someone that has recently purchased a new home (and has been monitoring the local market slavishly for nearly a year!) I can certainly confirm that in my area prices generally seem to be stagnating. But while that may be the case overall, I can also say that there are still pockets of sought after postcodes that continue to be fought over. And the reason why? Pretty much one reason (but I'll say it three times!) location, location, location.

Houses in good areas with low crime levels, good transport links, excellent State schools and with easy access to great facilities will in my opinion always be in demand, which is why although I do believe that house prices in general are set for a bit of a tumble, this won't necessarily be the case for all.

So what can you do to shield yourself from a potential fall in the price of your home?

         Firstly, think about what you want from your home. Is it an investment, or a home you intend to stay in for many years? If it's the latter, you could sit tight and simply watch from the sidelines, as even if house prices should fall in the next four years they will rise again eventually.

         If you haven't done so already consider switching to a repayment mortgage. Unlike an interest-only loan your monthly payments won't just tackle the interest accrued on your mortgage, they will also chip away a little of that home loan too. As time goes by and your mortgage reduces, more of what you pay will attack that loan until one day that property is all yours.

         Additionally, if you are considering jumping onto the housing ladder do your research carefully. Think about what you want from your home and try as hard as possible to "future-proof".

For example, if you know your next career step could involve commuting, check out areas with good transport links. Thinking about having children in the next few years? Then do some research to find out what the local schools are like (assuming you won't be opting for private education). And if you know you'll need more space in the future but can't afford a big house now, look for a property with the potential to extend. Plan ahead and you can hopefully rest assured that even if prices should fall you won't be forced to move.

And finally, if your lender allows it, make as many mortgage overpayments as you can. Throwing an extra £50 each month at a 25-year, £100,000 repayment mortgage at 6% APR would save over £16,000 in interest and shave a whopping 3.7 years off the term -- meaning you'd own your home outright in just 21.3 years! Most lenders allow borrowers to overpay by 10% of their loan value each year so make the most of it.

None of us knows what will happen in the future but with a little bit of planning we can certainly try to make the right decisions now.